Top 5 Key Performance Indicators for Accounts Payable Departments
September 9, 2020
Estimated reading time: 5 minutes
In 2016, Wells Fargo fired 5,300 employees for illegal banking practices carried through 2011 and was fined a $185 Million penalty. How does a massive workforce become motivated to commit a fraud of that scale? – Hijacking of strategy by numbers or “thug metrics” as Michael Harris and Bill Tayler mention in their HBR article. Wells Fargo created an incentive system that paid employees based on the number of accounts they opened. Employees found a loophole and created bogus accounts to drive up their key performance indicators (KPIs).
The Wells Fargo fiasco serves as a classic example of companies becoming too fixated on metrics, overlooking the overall business strategy. Quite often, companies put more focus on KPIs that are easy to measure such as sales volume or production cycles, and less emphasis on support functions such as accounting.
However, accounting departments are often wrought with inefficiencies and manual processes, being heavily reliant on paper and spreadsheets. Overworked and crunched for time, this department is often neglected when it comes to tracking and improving performance. Creating KPIs to measure what and where the bottlenecks are can have multiple benefits such as reducing inefficiencies, increasing agility, reducing costs or mitigating risks – to align the accounting department with the overarching goals of the organization.
KPIs for measuring success in accounts payable
Here are 5 KPIs to measure success in your AP department and identify the roadblocks costing time and money.
1. Cost to process a single invoice
Processing invoices manually can be expensive when factoring in hidden costs such as data entry, routing, and follow-ups. The average cost to manually process an invoice can be as high as $15. With better management, tracking and the use of technology, (such as AP automation software), highly efficient teams have driven cost down to an average of $2.36.
How to measure the cost of processing an invoice:
Divide the cost into labor and outright costs. For labor costs, survey your AP staff on the time they spend each day on key AP processes such as data entry, approval follow-up, cutting checks, PO matching, filing and scanning. Multiply that time by an hourly labor cost to find out the cost per month. Then, add additional hard costs spent on postage, printing, paper, document storage to the labor cost spent managing AP per month. Divide by the number of invoices processed monthly.
2. Invoice processing time
For organizations with manual AP processes, it can take up to 25 days for invoices to be approved. However, organizations with more mature AP processes are able to shrink this time down to 3-5 days. The impact of these delays can range from wasted time on approval follow-ups to vendor relationship damage, inability to capture early payment discounts, and delays in closing month-end. Some companies have become more creative to speed up approvals by using mobile applications.
How to calculate invoice processing time:
In a spreadsheet, document management or workflow system, record the date and time each invoice is received. After the approval cycle is complete, document the date and time the invoice was approved to be paid. Subtract the two dates to find the number of days. Take the average across all invoices over a period of time eg. monthly, quarterly.
Pro Tip: With AP Automation software, this is done automatically and you can easily look up reports on where the approval bottlenecks are.
3. Invoice exception rate
Invoices with errors or inaccuracies are exceptions that slow down the AP process. The culprit could be anything – a coding error or a duplicate PO. Either way it costs your staff time to spot the errors, track them down, and fix them. Once you’ve put your finger on the most frequent types of exceptions, you can work on your action-plan to resolve it.
How to calculate invoice exceptions per month: Keep a record of each exception as it happens. Number of exceptions per month ÷ total invoices processed per month x 100 = % of exceptions
4. Invoices processed monthly per FTE:
The number of invoices being processed per full-time employee is a critical indicator of efficiency and productivity (or lack thereof). Increasing the number of invoices your team can process, typically means freeing their time up for higher-value activities.
How to calculate the total number of monthly invoices processed per FTE: Total invoices processed each month ÷ number of AP employees (use decimals for part-time eg. 60 hours per week = 1.5 FTE)
5. Total touch points:
This measures how many interventions or touch points one invoice has as it’s being processed. Approximately 550 billion invoices are processed annually and almost 90% of these are sent through paper. The more manual the process, the more touch points there are. When manually done, steps like document preparation, PO matching, data entry, etc become increasingly laborious and carry a risk of errors. Reducing manual intervention where you see the most amount of delays and errors in AP can significantly make an impact.
How to calculate AP touch points : Create a chart to break out the entire AP workflow, for each process in AP – purchase orders, invoices, payments, and expenses. Add up the number of total touch points.
When choosing KPIs, stick to quantifiable measurements to gauge the AP performance relative to a goal that aligns with your business strategy. Misaligning metrics and strategy that inspires neither insight or foresight is one of reasons why most KPIs fail. Alibaba CEO Daniel Zhang, told his executives to become more creative about how it measures success. The signs of an efficiently operating AP team could be practices like using a mobile app for approvals, or eliminating paper by moving operations into the cloud. What’s key is not letting metrics serve as a proxy for strategy.
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